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In this tutorial we will show you how to use Ripsaw Assist™ by walking through two examples of portfolio construction and revision.
The tutorial Portfolio Revision with the Ripsaw Optimizer™ illustrates a multi-step thought and action process driven by the user to achieve a preferred asset allocation.
The Ripsaw Assist™ tool analyzes each optimization and provides a streamlined logic-driven process that does a lot of the thinking for you! The sequential steps in the process are:
- 1) Implement account transfers and trading constraints.
- 2) Use the optimizer to Minimize Deviations from your customized benchmark.
- 3) Use Assist to screen for underweight risk exposures.
- 4) Click on an underweight risk exposure to activate the screener for corresponding investments to add into specific accounts and Re-optimize.
- 5) Repeat until you can’t improve your asset allocation any further.
Here is the first example for portfolio construction. Jane and John Saw have accounts for savings, brokerage, and an IRA with cash and money market funds, but no stocks.
They previously set up a customized benchmark of 5% cash, 35% bonds and 60% stocks that summarizes their investment objectives and risk tolerance.
Their goal is to construct a portfolio that closely matches their benchmark strategic asset allocation. From their balance sheet, Jane clicks on Start a Revision, Expand All accounts and opens the Ripsaw Optimizer™.
Then she selects Minimize Deviations to activate the optimizer. Since there are no alternatives to the current allocations in each account, there is no change in allocations and a zero reduction in deviations from their benchmark.
Jane clicks on Assist for guidance. The top indication is a cash overweight from banking accounts alone. The amount of cash in their savings account is 2.5 times their benchmark allocation of $20,000. She moves the $50,000 from savings to their brokerage account where it can be invested in bonds and stocks as well as cash.
Adding specific underweight risk exposures through additional investments in appropriate accounts from the list will methodically allow the optimizer to provide asset allocation solutions that reduce deviations from the benchmark. Jane selects Stocks.
Assist knows your benchmark composition and offers to add the same stock funds or others with similar characteristics. Jane chooses the benchmark fund VTI as a source of the US total stock market.
The next step offers accounts in which to add VTI. It also indicates which investment accounts have the overweight in cash that is available to purchase stocks. Jane selects both the joint brokerage and IRA accounts to Add and Continue.
Next, she clicks on the benchmark fund VXUS as a source of the Non-US total stock market. Since this ETF has a relatively high dividend yield, Jane only selects her tax-deferred IRA to Add and Re-Optimize.
The result of the optimization is a 74.663% reduction in deviations from their benchmark. Note the Non-allocated funds and sales of the money market fund VMFXX that are used to purchase the amounts of VTI and VXUS in each account.
Although this asset allocation is closer to the benchmark, they are not done yet. The red indicators imply more improvement is likely available.
Jane clicks on Assist for more guidance, selects Bonds from the top of the underweight list and chooses the benchmark fund BND for the US investment grade bond market risk exposure. She adds BND to her IRA for its favorable tax treatment.
With a click on Add and Re-Optimize, an asset allocation across both accounts achieved a 99.588% reduction in deviations from their custom benchmark.
In the dashboard, they observe how very close the allocations to Cash, Bonds and Stocks are to their benchmark strategic asset allocation.
Also, note that all of the 56 portfolio risk exposures defining portfolio composition have trivial differences from their corresponding benchmark risk exposures with all green indicators.
Furthermore, all the sales and purchases necessary to achieve this asset allocation are in the revision section of each account.
Now let’s backup one step to consider another way of achieving a satisfactory alternative without using all benchmark funds. Jane goes to her IRA and removes BND from that account.
Then she clicks on Minimize Deviations to get back to where they were before adding bond opportunities. Jane selects Assist for more guidance, clicks on Bonds, and this time, picks Other for the Ripsaw® Screener to provide a list of funds that satisfy her settings.
If the list is not sufficient, she can change the settings and apply them to generate an expanded or shorter list.
Jane selects the low-cost Schwab US Aggregate Bond ETF with ticker SCHZ. Note that this fund’s allocation to BBB quality bonds is less than that in the benchmark bond fund BND ETF. Jane chooses SCHZ and places it in her IRA account to Add and Re-optimize.
The result is a 97.922% reduction in deviations from the benchmark. That is close but clicking Assist shows an underweight in BBB bonds and in the 1-to-3-year maturity bucket. This is due to composition differences in the benchmark BND ETF from the selected Schwab US Aggregate Bond ETF.
Jane clicks on BBB, then chooses IGEB for its large BBB weight to include in her IRA account. Then she clicks on Add and Re-optimize to further reduce deviations from her benchmark to 98.42%.
Going to Assist now indicates underweights in Government Bonds and the 1 to 3 Years maturity bucket. Clicking on Govt Bonds, Assist is smart enough to combine the two underweights into one investment decision by the screener focusing on short-term government bond funds. Jane chooses VGSH for her IRA to ADD and Re-optimize.
The result is now 98.843% reduction in deviations from their custom benchmark and Assist indicates “No Significant Underweight Risk Exposures.”
All the sales and purchases necessary to achieve this asset allocation are in the revision section of each account.
Now we are moving onto the second example for portfolio revision with tactical trades and three more accounts:
John’s Rollover IRA with a concentrated stock portfolio;
Jane’s 401k with a single stock index fund that is the least bad option available in a set of poor choices with very high expenses; and
Jane’s 403b TIAA Traditional annuity modeled as a AAA, 25 to 30-year bond investment that has a rate floor worth keeping.
From their balance sheet, they click on Start a Revision, Expand All accounts and open the Ripsaw Optimizer™. Then they select Minimize Deviations to activate the optimizer.
The initial solution offered reduces risk exposure deviations from the benchmark by 29.061%. Although this is movement in the right direction, there are still red indicators of a significant Cash overweight and underweights in Bonds and Stocks.
Jane and John click on Assist for guidance. The top indication is a cash overweight from banking accounts alone so they move the $50,000 from savings to their brokerage account.
They select Bonds from the top of the underweight list and pick BND to add to Jane’s IRA and John’s Rollover IRA.
With a click on Add and Re-Optimize, the asset allocation solution across all accounts has a 63.611% portfolio deviation reduction from their custom benchmark. In the dashboard, they observe a close match to the bond portfolio allocation, but still have a significant overweight in Cash and underweight in Stocks.
Jane and John click on Assist for more guidance. They note the reduction from the previous optimization is a large 34.549%, but that there are still a lot of underweight risk exposures remaining. That means there are more opportunities to improve their asset allocation.
They click on Stocks, select VTI and choose their joint brokerage account, Jane’s IRA and John’s Rollover IRA to add VTI availability and continue.
Next, they select VXUS with its relatively high dividend yield for the more tax-efficient IRA accounts to Add and Re-Optimize.
It is nice to see a substantial improvement in total deviation reduction at 91.622% from the benchmark and that the Cash, Bonds and Stocks indicators in the dashboard are all green.
However, what about the composition of the Bond and Stock portfolios? Clicking on Assist, they see no underweights in the stock portfolio composition, but their bond portfolio is underweighting in MBS, Corporate and short maturity bonds.
This is likely due to the large tactical holding of the TIAA Traditional annuity that is modeled as equivalent to a 25 to 30-year AAA credit quality government bond. If the optimizer invested more in BND that has the underweights, it would significantly overweight the risk exposures that are also in TIAA Traditional.
Assist is suggesting that Jane and John could add more of these subsector underweight risk exposures without adding more of what is in TIAA Traditional to get closer to their benchmark.
Jane and John click on Agency MBS, select VMBS from the screener list and choose their tax-efficient IRAs to Add and Re-Optimize. This result did not show any improvement.
They click on Assist, then on Corporate Bonds where we see that Assist is recognizing that the addition of short and intermediate corporate bonds will help alleviate both the corporate bond and the short and intermediate maturity bucket underweights.
They pick VCSH and VCIT for their tax-efficient IRAs to Add and Re-Optimize.
The result improves the reduction of deviations from their benchmark to 93.916%.
The Saw’s click on Assist, the 1 to 3 Years underweight, select VGSH for short-term Treasury risk exposure and the same IRAs to Add and Re-Optimize.
This result reduces deviations from their benchmark to 94.362%.
The Saw’s click on Assist and then on the 3 to 5 Years underweight, select VGIT for intermediate-term Treasury risk exposure, and the same IRAs to Add and Re-Optimize.
The optimizer now indicates an improvement to 94.916% reduction in deviations from their benchmark.
They click on Assist and then on the 15 to 20 Years underweight, select VGLT for long-term Treasury risk exposure, and the same IRAs to Add and Re-Optimize.
The asset allocation solution remains at a 94.916% reduction in deviations from their benchmark. Clicking on Assist indicates modest underweights in Agency MBS and the 15 to 20 Years maturity bucket, both of which were previously added investment opportunities.
The remaining deviation from their custom benchmark is the cost for the tactical choice of the TIAA Traditional holding in Jane’s 403b account.
In the dashboard, observe how very close the Cash, Bonds and Stocks allocations are to their benchmark strategic asset allocation.
Furthermore, all the sales and purchases necessary to achieve this asset allocation are in the revision section of each account.
Note that the process has been Minimize Deviations, Assist, Minimize Deviations, Assist, and so forth until no further improvement is available.
One more thing. This asset allocation sold all of John’s large overweight positions in Apple and Tesla stock in favor of a large well-diversified stock portfolio that includes them as a market value weight.
John believes both are undervalued by the market and wants to tactically overweight them. He also now realizes that it is more efficient to hold these companies in their joint brokerage account where capital losses can provide the harvesting of a tax deduction or that future realized capital gains will be taxed at a lower rate.
In his Rollover IRA, John uses the constraints column drop down to place the $0 investment on hold for each of them.
Then he adds Apple and Tesla to the Jane and John Saw Brokerage account, enters the 50,000 dollars for his minimum investment decision in each and places a hold constraint on both of them.
John then goes to the Optimizer and clicks on Minimize Deviations to obtain an asset allocation that reduces deviations from their benchmark to 82.53%. The decrease from the previous 94.916% is due to the Apple and Tesla overweight moving them away from their benchmark.
Clicking on Assist reveals underweights in Mid Cap, Small Cap and Blend due to John’s tactical overweight in the Apple and Tesla large cap growth stocks. This can be mitigated by reducing these underweights. First with the selection of the Mid Cap underweight.
John picks VIMAX, selects their joint brokerage and IRAs to Add and Re-Optimize for an improvement to 84.224% reduction in deviations.
After clicking on Assist, John selects the underweight in Small Cap, chooses FLXSX and the same three accounts to Add and Re-Optimize for a small improvement to 84.439% reduction in deviations.
Next, John clicks on Assist again, selects the underweight in Blend where Assist suggests adding the small, mid and large cap components separately for more flexibility.
When Assist gives the fund choices for small cap stocks, it knows that value is also underweight and goes further by offering Small-Cap Value funds to more efficiently offset the large cap growth aspects of Apple and Tesla.
John’s favorable view of Apple and Tesla is their products and management, not that they are classified as growth and large cap. Therefore, he chooses VRTVX for the same three accounts.
For Mid-Cap Value John selects VOE for the same three accounts and for Large-Cap Value he picks MGV for the same three accounts to Add and Re-Optimize.
The asset allocation improvement to 90.453% reduction in deviations from their custom benchmark is substantial.
Clicking on ASSIST indicates an underweight in BBB bonds. John selects BBB and chooses IGEB for its large allocation to BBB bonds, picks the two IRA accounts to Add and Re-Optimize for a small improvement to 90.493% reduction in deviations from their benchmark.
Clicking on Assist shows only underweights that have already been addressed.
In the dashboard, observe how very close the allocations to Cash, Bonds and Stocks are to their benchmark strategic asset allocation.
Going back to the optimizer and scrolling through the 56 risk exposure deviations indicates that the only significant red ones are for the 20 to 30 Years maturity bucket due to the tactical TIAA Traditional investment as well as the value stock overweight and blend stock underweight associated with the tactical overweight in Apple and Tesla stocks.
Scrolling through the Revision Section of each account gives all the details for the transfers, sales and purchases necessary to achieve this asset allocation.
For convenience, Jane and John can go to the Revision Actions drop down menu and select Save As for the list of account actions to implement all of the revision decisions and recall for future use.
Always make sure any solution makes investment sense. Infrequently, the optimizer may get stuck in a suboptimal solution. In that instance, the user should click on Minimize Deviations again to re-optimize (multiple times if necessary).